Climate change is arguably the most profound challenge facing global society. Urgent action is needed if we are to meet the goal of limiting the increase in global temperature to well below 2 degrees Celsius (°C) above pre-industrial levels.
For one, scientists have forecast that carbon emissions must halve by 2050. Generating more of our electricity from renewable sources will be critical to our chances of achieving this. Indeed, the International Energy Agency posits that the shift towards renewables, as well as greater energy efficiency, will drive 80% of the necessary reduction in emissions.
The scale of the investment required to meet the 2°C target is enormous. It has been estimated that more than US$ 14 trillion needs to be invested in renewable energy infrastructure by 2040. With governments having largely stepped back from delivering energy projects, private investors will be instrumental in plugging this gap.
Where companies can step in to supply the growing demand for green electricity, I believe there are exciting opportunities for investors.
New technology and rapidly falling costs mean that generating electricity from the wind and sun has become highly competitive. Across many parts of the world, they are now capable of competing on price with traditional fuels, even without subsidies.
The expansion in solar and wind farms has been rapid, and is expected to multiply further. The IEA estimates that around 60% of electricity will come from renewables by 2040, roughly twice their share today. The widespread adoption of these two, largely complementary, power sources can make a substantial contribution to combatting climate change.
For investors, this represents not just a chance to contribute to better outcomes for the planet, in my view, but also to achieve sustainable long-term financial returns.
Investments in companies that own physical renewable infrastructure share the traditional qualities of utilities – namely income streams that are relatively reliable and the appeal of owning valuable assets that cannot quickly be replicated.
Moreover, investors in these companies are also tapping into a growth story. Irrespective of the global economy’s health, if we are to meet global targets for curbing emissions, the rise of renewable energy is a structural growth trend that looks set to continue for decades.
I believe investment strategies that can successfully harness this trend, which is vital to combatting the threat of irreversible damage to a warming planet, look set to benefit from strong long-term tailwinds.
The views expressed here should not be taken as a recommendation, advice or forecast.
The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.